Credit risk dynamics under global uncertainty: Shock–regime dependence

This study investigates the credit risk of Indonesian banks under the influence of global uncertainty, particularly global trade uncertainty (GTU) and global financial uncertainty (GFU). Unlike most studies that treat credit risk as a homogeneous concept, this research distinguishes between two key components: inherent risk, which arises from borrower fundamentals, and mispricing risk, which originates from banking behavior. Using quarterly data for 33 publicly listed banks from 2010 to 2022, this study adopts a multi-method approach. Specifically, stochastic frontier analysis is employed to decompose credit risk, feasible generalized least squares (FGLS) is used to estimate the impact of global uncertainty, and ΔCoVaR is applied to identify distress conditions. In addition, a dynamic fixed-effects (DFE) model is used to examine the long-run dynamics. The findings reveal that inherent risk is procyclical with respect to both GTU and GFU. In contrast, mispricing risk exhibits a countercyclical pattern, suggesting a “stability leading to instability” mechanism. The severity of shocks arising from global uncertainty depends not only on the magnitude of external shocks but also, more critically, on pre-crisis conditions such as liquidity strength, capital adequacy, and prudent monetary policy. These results imply that policy responses during periods of distress should be tailored to the source of the shock—whether originating from the trade sector or the financial system. Such targeted responses are essential not only for mitigating short-term vulnerabilities but also for safeguarding long-term financial stability.